If you want to keep a vehicle with a debt against it, Chapter 13 can really help.

It’s almost as if the more worse off you are with this kind of debt, the more Chapter 13 can help:

If you’re behind on payments, you’ll be given a long time to catch up, and may not even need to

If the car or truck is not worth as much as you owe, “cramdown” can lower your monthly payments, the interest rate, and reduce the total amount you pay for it

If you fall behind later, you’re protected from repossession

Chapter 13 also generally allows you to favor your vehicle loan above most other debts.

Today we’ll show you how this works with a hypothetical example.

The Facts

Emily got laid off and it took her a couple months to find another job, which she just started. She’s now a few days away from being 2 months late on her vehicle loan. She absolutely needs her vehicle to get to and from her new job. She has no way to get a reliable replacement vehicle.

Her first paycheck doesn’t arrive for 2 weeks, and she has to use it to pay rent, utilities, and groceries. Her car payments are $450 per month, so she’s about to be $900 behind. Emily has absolutely no savings, nothing worth selling to raise money, and no one to borrow from. She knows her car’s on the brink of being repossessed, but sees no way to catch up. She’s really scared.

She owes $13,500 on her car, which is worth only $8,000. It’s a relatively high interest loan, because her credit was not great when she bought the car. She wishes the monthly payments weren’t so large.

Emily also owes $80,000 in a combination of credit cards and medical bills, most of which are past due.

So she goes to see a bankruptcy lawyer to see if she has any sensible options.

Chapter 7’s Shortcomings Here

The lawyer tells Emily that a Chapter 7 case would very likely discharge—permanently write off—her $80,000 in other debts. But it wouldn’t provide much concrete help with the vehicle loan.

She could surrender the car to her lender, and she’d owe nothing. But she’s committed to keeping the car. To do so in a Chapter 7 case she’d have to “reaffirm” the debt—agree to remain liable on it.

The immediate problem with that is that Emily would have to catch up on the late payments. And do so pretty fast—within a month or two after filing her bankruptcy case. Even after not having to pay her other debts, she just doesn’t have the cash flow to scrape together the money that fast.

The other problem is that reaffirming the car loan would be risky for Emily. The payments are too high for her. She owes substantially more than it’s worth. If a year or two down the line she couldn’t make the payments and the car would get repossessed, she would almost for sure still owe a lot to the vehicle lender. She’d owe the balance owed at the time minus whatever the lender would sell the car for at an auto auction. So Emily would have no car but would still owe a substantial debt.

The Chapter 13 Solution

Emily’s lawyer advises her to file a Chapter 13 case instead. Because the car is worth less than its debt, she can do a “cramdown” on the loan. As a result:

She doesn’t have to catch up on the missed payments at all.

The loan is effectively rewritten based on the value of the car at the time, $8,000.

Her monthly payment is reduced from $450 to $295.

The interest rate is reduced.

The unsecured part of the debt—$13,500 minus the $8,000 car value, or $5,500—is lumped in with the $80,000 of credit card and medical debts, and Emily pays these “general unsecured” debts only to the extent that her budget allows. Whatever remains unpaid at the end of the Chapter 13 case is discharged, written off.

So, Chapter 13 solved all of Emily’s concerns: she avoids repossession, gets to keep her car without having to come up with the missed payments, and reduces both the monthly payments and the total paid for the vehicle before it’s hers free and clear.